Cover Story: The economics of running a public transit system

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IN the business of public transport, it is a challenge to break even, let alone make profit. Many companies that provide such services often rely on government financial support in the form of subsidies or grants to stay afloat.

Among the financial challenges that public transport providers face is insufficient fare revenue to cover operational costs as the former is highly dependent upon fares — often regulated by the government — and demand.

Fares, in turn, are highly influenced by factors such as the company’s internal operational costs, public user ridership patterns and political considerations.

Prasarana Malaysia Bhd, a government-controlled and owned urban public transport provider under the Ministry of Finance, is no different and faces the same predicament.

The company, via its subsidiaries, operates the Ampang and Kelana Jaya lines of the light rail transit (LRT) and monorail line in Kuala Lumpur as well as the RapidKL bus service in the Klang Valley. It also provides public bus services in Penang and in Kuantan, Pahang.

Prasarana’s 2012 annual report shows that its operational loss widened on the back of flattish revenue. In its financial year ended Dec 31, 2012 (FY2012), Prasarana registered an operational loss of RM509.8 million compared with RM338.2 million in the year before. Revenue was flat at RM464.8 million.

As a result, net loss rose to RM817.7 million in FY2012 from RM742.5 million previously. This was despite the recognition of RM117.3 million in income from a government grant and the amortisation of deferred income amounting to RM11.6 million for the year.

Prasarana said the government grant was to set off against its depreciation expenses for property, plant and equipment while the deferred income referred to a government stimulus package of RM340 million — received from the government in 2011 — to cover the cost of repairs, upgrades and maintenance of public transport and its infrastructure.

Even with financial support from the government, Prasarana sank further into the red.

Most public transport systems in the world are subsidised by the government or other revenue, such as from advertising. One indicator of the need for support is the farebox recovery ratio, which is a measure of the proportion of fare revenue as a fraction of a public transport system’s total operating expenses.

Prasarana has a farebox recovery ratio of 75%. This means that for every ringgit of operational costs, only 75 sen is met by passenger fares.  

By comparison, the ratio for Singapore’s public transport operator SMRT Corp Ltd is 92% and Hong Kong’s MTR Corp Ltd is 180%.

Based on this measure, Prasarana and SMRT Corp are unable to cover their operational costs solely with fare revenue collection. MTR Corp is more than able to cover its costs from passenger fares alone. In fact, it operates one of the few self-supporting transit systems in the world.

Nevertheless, Singapore-listed SMRT Corp has stayed in the black as its top and bottom lines are supplemented by non-fare businesses, such as taxi services, rental of commercial and media space, engineering and consultancy, and project management, as well as maintenance services.

While SMRT Corp is also subsidised by the Singapore government, the grants of S$15.2 million received and recognised on its books only make up around 36% of other operating income and comprise an insignificant contribution to net profit.

In FY2014 ended March 31, SMRT Corp made a net profit of S$61.9 million, a 25.6% decline from S$83.2 million the year before. SMRT Corp attributed the poorer profit to higher operational costs and depreciation arising from capital expenditure, primarily to “meet its regulatory obligations”.

In terms of segmental performance, SMRT Corp said its rail segment registered a meagre operational profit of S$1.1 million while its bus segment was dragged down by an operational loss of S$28.5 million.

SMRT Corp would have reported a net loss if not for its non-fare businesses, which contributed an operational profit of S$111.7 million.

MTR Corp too remained in the black, although its net profit weakened. The listed group provides train, light rail and bus services. Its non-fare businesses include station commercial business, property rental and management, and property development.

Its 2013 annual report shows that  net profit was HK$8.6 billion, down 10.4% from HK$9.6 billion previously.

While its high farebox recovery ratio clearly reflects MTR Corp’s ability to cover operational costs without needing cross-subsidies from non-fare businesses, the latter contributed significantly to its bottom line with an operational profit of HK$9.08 billion.

It is worth noting that MTR Corp utilised a government subsidy for its Shenzhen Metro Longhua Line operation to offset interest and finance charges of HK$254 million in the year ended Dec 31, 2013.

The firm also incurred a net cumulative expenditure of HK$12.63 billion, which was fully offset by a government grant, for the financing, design, construction and operation of a rail line.

Coming back to Prasarana, the company could increase its diversification into non-fare businesses to cross-subsidise its fare businesses. Currently, Prasarana’s sole non-fare business is the rental of commercial space, which contributed RM20.7 million to revenue, or only 4.5% of total revenue in FY2012.

Increasing its non-fare businesses may be helpful for Prasarana in the longer term. In fact, given the government’s efforts to reduce subsidies to improve Prasarana’s fiscal position, it may be better off with more non-fare businesses. — By Jeffrey Tan

This article first appeared in The Edge Malaysia Weekly, on October 06 - 12, 2014.